Scandinavia’s Richest Corner Breaks Global Central Banking Mold

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As much of the world’s central banking community goes into a defensive crouch, Norway is signaling it’s ready to deliver multiple interest rate hikes.

Norges Bank said on Thursday it will probably raise interest rates in June, three months after the last increase. In an interview after the announcement, Governor Oystein Olsen added that it’s fair to infer from the bank’s forecasts that Norwegian rates will be raised up to three times this year alone, which would bring the benchmark to 1.5%.

“There are good prospects for the Norwegian economy,” Olsen said in Oslo.

In neighboring Sweden, Denmark and the euro zone, rates are unlikely to rise above zero before 2020. But they’re all facing very different economic realities than Norway, which is western Europe’s biggest oil exporter and the home of the world’s biggest sovereign wealth fund.

The Norwegian economy is nearing full capacity. Its labor market is getting tighter and inflation is above Norges Bank’s target. Halfdan Grangard, a senior economist at Handelsbanken, says Norway is simply in a “different phase” than its main trading partners.

Continue Raising

Erik Bruce at Nordea says there’s little doubt that Norges Bank is doing what’s right for the economy, given its strength.

“We’re definitely of the view that Norges Bank ought to continue raising rates,” he said. “Norway’s economy is growing very robustly at the moment, and as long as the price of oil doesn’t collapse, so long as the world economy doesn’t go so badly that oil and commodity prices collapse, then things are looking really good for Norwegian industry.”

Central bankers are generally cautious about deviating too much from their peers because of the potential fallout for the exchange rate. But Norway’s krone seems immune to the hawkish signals coming from Norges Bank. Since late April, Norway’s currency has lost almost 3% against the euro.

“It could be a problem if the Norges Bank’s solo performance resulted in a really strong krone, but the krone is historically weak,” Bruce said. “So there’s nothing to stop Norges Bank.”

Grangard at Handelsbanken notes that the divergence between Norway’s economy and the rest of the developed world may be temporary.

“We’re in a situation where oil investments are picking up a lot this year,” he said. “But this is a temporary stimulus factor and it will recede when we get into next year.”

In its announcement on Thursday, Norges Bank said the balance of risks points to “gradual” tightening. The bank plans to raise rates despite the fact that the “uncertainty surrounding global developments persists,” it said.

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